Doing business in Japan – Part 2

doing business in Japan
doing business in Japan

The most common business vehicles in Japan

The joint stock company (kabushiki kaisha) is the most prevalent corporate business vehicle in Japan (KK). The limited liability corporation (godo kaisha) (GK) is also becoming more popular. Both entities ensure that shareholders and members have minimal responsibility. The GK was released in 2007 and is still not commonly used. In comparison to a KK, the GK allows more flexibility in the internal governance structure and is considered as a check-the-box company for US tax purposes, despite the fact that both forms are subject to entity-level taxes in Japan. Because reporting requirements do not apply to a GK, many international firms have organized their Japanese subsidiary as a GK.

The main registration and formation requirements

A joint stock company (KK) can be formed by registering it in the commercial register with the local legal bureau with authority over the region where the KK’s main office is located. There will be a registration cost of 0.7 percent of the paid-in capital (excluding capital reserves) (with the minimum fee being JPY150,000). A KK is deemed created when the registration application is received, however the certificate of the commercial register will not be available for some time.

  • Several papers are required for registration, the most significant of which is the articles of incorporation (teikan), which must have the following information:
  • The name of the KK.
  • The KK’s commercial objectives.
  • The site of the KK’s headquarters.
  • Other aspects of governance.

Before the articles of incorporation may be registered, they must be certified by a Japanese public notary.

Reporting requirements

In line with its articles, a KK must publish its financial accounts after the end of each business year in the official gazette (kampo), a daily newspaper, or on a website (which requires the appointment of a third-party observer to supervise the continuance of publishing). The extent of financial statements subject to obligatory reporting varies according to the size of a KK. Profit and loss statements are not needed to be made public for companies with less than JPY500 million in paid-in share capital and JPY20 billion in liabilities.

The Financial Instruments and Exchange Act, as well as the rules of major stock exchanges, impose significant disclosure obligations on publicly traded firms. Any modification to a registered item in the business registration must be registered with the relevant local legal office.

Share capital

A KK has no minimum or maximum share capital requirement.

Contributions-in-kind

Contributions-in-kind (share issuances for non-cash compensation) are authorized and do not need onerous processes provided the non-cash payment fulfills specific requirements, such as donation of marketable securities at market value or any asset at a value verified by a professional appraiser. If no exceptions apply, the non-cash payment must be examined by a court-appointed examiner to ensure that its value is not less than the issue price of the shares. Depending on the sort of non-cash payment, this procedure might take many months.

Restriction on the rights attached to shares A KK can issue multiple classes of shares by stating the terms in the articles of formation. Such terms must be in line with the Companies Act and address one or more of the following:

  • Dividend payments are made.
  • Preferences for liquidation
  • The right to vote
  • Restriction on transfers
  • Class shareholders’ conversion or other rights
  • Conversions, redemptions, or other call rights of the issuer are required.
  • Class shareholders have been granted veto power.
  • Class voting is used to elect directors and statutory auditors.

Automatic rights affixed to shares.
When a KK exclusively issues common stock, all shareholders have the same rights in proportion to their holdings, including dividend payments, liquidation payouts, and voting rights.

Management structure

A joint stock company (KK) is required to appoint at least one director (torishimariyaku), and shareholders have the right to vote on all matters unless the KK elects to create a board of directors. If a KK establishes a board of directors, shareholders can only vote on matters specified by the Companies Act and the articles of incorporation.  A KK that has a board of directors must additionally appoint one or more statutory auditors (kansayaku) or accounting advisers (kaikeisanyo), or form a statutory committee. A KK with a paid-in capital of JPY500 million or more, or liabilities of JPY20 billion or more, must appoint an accounting auditor (kaikeikansanin).

Management restrictions

A director or other official of a KK may be of any nationality or reside anywhere in the world. Previously, at least one representative director had to be a Japanese resident, but that condition was eliminated in 2015.

Directors' liability

The directors of a KK owe the KK the duties of a good manager (akin to fiduciary duties under common law) (not directly to the shareholders). However, Japanese courts give directors considerable latitude in business judgment, unless there is a defect in their fact-finding or their decision-making is extremely irrational. There is a shareholder derivative action possible. If a director or officer breached their responsibilities deliberately or grossly negligently, they can be held personally responsible to third parties that suffered damages as a result of the violation.

Parent company liability

In general, a parent company is not responsible for the KK’s obligations. The broad principle of lifting the corporate veil, on the other hand, appears in case law. The parent company may be held responsible for the KK’s obligations if the court determines that the:

  • The parent business takes use of the KK’s restricted liability.
  • KK lacks the legal substance of a separate business (typically a constant failure to hold shareholder or board meetings, or a commingling of operations or assets with the parent).

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